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Dr. Vernon L. Smith was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics. Dr. Smith has joint appointments with the Argyros School[…]

Even though the circumstances would be foreign to him, the great Austrian economist wouldn’t be surprised.

Question: What would Hayek say about this crisis?

Vernon Smith: Hayek emphasized and the Austrians did, that credit bubbles would always create difficulties for the economy, that whenever you had an expansion of investment capital by businesses that was very much dependent upon credit extension that that would always tend to create unsustainable market conditions and you would tend to have an expansion that could not be continued without a painful readjustment.  The thing that was I think sort of not made explicit in most of the Austrian discussions was that the importance of consumer durables.  Although certainly any durable good would fit into the Austrian argument that if those were being bought out of credit expansion rather than ordinary savings generated in the economy there was the possibility that you would have the need for some adjustment, so I think although Hayek didn’t really discuss or consider the kinds of special circumstances we’ve seen in the housing market I don’t think he would be surprised at what happened and what we observed. 

Recorded on December 17, 2009

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